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De Facto Directors Again

From August 2011 update of Jordans Company Administration and Governance: IN FOCUS

Being a director is, and should be, an onerous task. A director is defined in s 250 of the Companies Act 2006 as: ‘any person occupying the position of a director, by whatever name called.' The real significance of the decision lies not so much in what it says but rather what it does not say. Read literally, it appears to state the obvious: a director is a director. However, where the significance lies is in what is not said. Nowhere does it say that a director must be appointed; nor does it say that he is defined by filing with the Registrar his consent to act or entering his name on the register of directors. Thus a person can be a director, and be held liable as a director, whether he has been properly appointed and complied with his legal obligations in this regard or not.

The question of de facto directors arose again recently in a case before the Court of Appeal, Re Mumtaz Properties Ltd [2011] EWCA Civ 610. The case concerned a property company, seemingly run by five members of the same family. All had significant sums that they appeared to owe to the company as a result of drawings on directors' loan accounts. The company was in liquidation, and the liquidator was seeking repayment of these loan accounts.

Two of the family members were undoubtedly de jure directors, having been duly appointed and been registered as such at Companies House. Of the others, one, an old man, was not a de jure director but held 50% of the shares and his wife held the other 50%. He, with the remaining two, who had responsibilities in the running of the business, was found to be a de facto director of the company. One, in particular, had responsibility for dealings with the company's suppliers and also represented the company in negotiations with local authorities, even though he did not hold himself out as a director.

From the report of the case, it is apparent that either the records maintained by the company were woefully inadequate or that for whatever reason they were not available to the liquidator. However, Arden LJ made it quite clear that this was no help to the directors in seeking to defend themselves. Persons who run the business of a company with a high degree of informality cannot seek to avoid liability for this reason, nor can they seek to be judged by some lower standard than that which applies to directors who conduct their corporate affairs properly. In the absence of proper records, a trial judge is entitled to draw what inferences he will from the lack of documentation.

In this case, the directors, and this included the de facto directors, took no heed of and paid no regard to the accounts of the company. This was a clear breach of duty laying them open to misfeasance proceedings by a liquidator under s 212 of the Insolvency act 1986. The liability is imposed on directors who, as such, are in a position to prevent damage to creditors by taking those steps necessary to protect the creditors' interests. There is no single test to identify what a person has to do to constitute himself a de facto director, but if he can be shown to be part of the corporate governance structure of the company then he can be held to be a de facto director and thus fall under the legal obligations of any other director. Not only were all the directors held to be liable for breach of a duty and liable to repay their own directors' loan accounts, but most were also held to be jointly liable for the loan accounts of the other directors.